Growth capital

Question 1

what is growth capital?

Answer 1

Growth capital is a type of private equity investment, usually a minority investment, in relatively mature companies that are looking for capital to expand or restructure operations, enter new markets or finance a significant acquisition without a change of control of the business.

Question 2

key points of growth capital

Answer 2

Minority investment,
Mature company and
No significant change of control.

Question 3

The reason that companies seek for growth capital

Answer 3

Companies that seek growth capital in order to finance a transformational event in their lifecycle, such as:

• fund major expansions,
• acquisitions
• Investments (equipment purchases),
• sales and marketing 营销举措initiatives and
• new product development.

Question 4

What are the feature of growth capital investment?

Answer 4

• Company’s revenues are growing rapidly.
• Company is cash flow positive, profitable or approaching profitability.
• Company may be founder-owned and often has no prior institutional investment.
• Investor is agnostic about control and purchases minority ownership positions more often than not.
• Industry investment mix is similar to that of venture capital investors.
• Capital is used for company needs or shareholder liquidity and additional financing rounds are not usually expected until exit.
• Investments are unlevered or use light leverage at purchase.
• Investment returns are primarily a function of growth, not leverage

Question 5

the structure of growth capital

Answer 5

Growth capital is often structured as preferred equity, although certain investors will use various hybrid securities that include a contractual return (i.e., interest payments) in addition to an ownership interest in the company.
Growth capital can also be used to effect a restructuring of a company’s balance sheet, particularly to reduce the amount of leverage (or debt) the company has on its balance sheet.
Growth capital is designed to facilitate the target company’s accelerated growth through expanding operations, entering new markets, or consummating strategic acquisitions.

Question 6

compare with traditional private equity.

Answer 6

Growth Capital, when properly sourced, diligenced, negotiated, and executed, growth capital can represent a lower risk-adjusted cost of capital for the investor when compared with traditional private equity investments.

Question 7

Growth equity versus VC

Answer 7

VC: invest in early stage operating company with unproven business model.
GE: invest in mature operating company with proven business model.
VC: underwritten on substantial revenue growth projections.
GE: underwritten on defined plan to achieve profitability potential.

Question 8

GE VS control buyout

Answer 8

GE:
1. invest in a minority equity position
2. invest in operating firms with limited or no free cash flow
3. invest in operating firms with minimal or no debt.
4. invest at inflection point where growth capital can fuel substantial revenue and profitability growth.
Control buyout,
1. invest in controlling equity position.
2. invest in highly profitable operating companies with consistent free cash flow
3. often have debt financing to leverage the investment
4. invest at point where revenue and profitability are projected to grow steadily

Question 9

Deal Characteristics of growth capital

Answer 9

Growth equity terms are deal-specific. Depending on several key metrics, such as operating history, financial performance, addressable market, and capitalization, a growth equity investment may be documented very similarly to a traditional, late-stage venture capital financing

Question 10

risk of growth capital compare to vc and buyout

Answer 10

lower risk but with a comparable return. (lower risk than VC but higher return than vc)

Question 11

Redemption Rights of growth capital

Answer 11

In evaluating investor redemption rights, there are three principal considerations:

• redemption triggers;
• redemption value and sources of funds; and
• remedies for defaulted redemption.

Question 12

Redemption Triggers of growth capital

Answer 12

The most common triggers for the growth equity investor’s right to compel the issuer to redeem its stock are:

Time – Similar to investor redemption rights in PIPE (private investment in public equity) transactions, this redemption trigger is typically set at 60-66 months after the original issuance date.

Performance Milestones – Typically benchmarked against the investment thesis or management case, defined revenue or profitability growth, customer wins, etc., and may be tested multiple times during the life of the investment.

Covenant Default – Similar to events of default in debt financings, this redemption trigger is based on the issuer’s failure to satisfy defined covenants – usually financial covenants

Question 13

Defining Redemption Value

Answer 13

Upon exercise of its redemption rights, the investor’s equity interest is redeemable at a pre-negotiated “redemption value”.
The redemption value is often set at:
-the original issuance price plus an accruing preferred return,
-A multiple of the original issuance price,
-the then-fair market value of the equity interest, or
-a higher of combination of some or all of the foregoing.
- 上述部分或全部的组合中的较高者

Question 14

Sources of Funds

Answer 14

use all legally available funds,
undertake a forced sale of other capital raising transaction,
issue a promissory note for the redemption value, and/or
use all other available means in order to effect a required redemption.

Question 15

Investors will often negotiate for some or all of the redemption default remedies by :

Answer 15

spring board: enables the investor-controlled board to pursue a liquidity-generating transaction and modify the issuer’s management team

force sale

modified economic right: include, among others things, warrants, stock dividends, or default interest rate on preferred investment, etc